Your guide to new aged-care rules

The minute Prime Minister
Julia Gillard
started talking about moving further down the track to a “user pays" aged-care system, self-funded retirees should have reached for their worry beads. The new regime will ensure more aged-care services are provided at home so the elderly won’t have to move to nursing homes prematurely and be forced to sell the family home to secure an aged-care place.

But someone will have to pay, particularly as these additional services are being introduced at a time when the population is ageing rapidly. The number of Australians aged 85 and over is projected to increase from 400,000 in 2010 to 1.8 million by 2050.

By 2050 it is expected that more than 3.5 million Australians will access aged-care services each year. But, happily, the prospect of having to pay an accommodation charge to enter a nursing home that caters to the incapacitated and the widening of means testing for some nursing home fees to include an assets test might not mean the end of the world – or the kids’ inheritance.

Experts argue that not all the strategies popular among self-funded retirees moving into aged care will become obsolete and new ones will be dreamed up to take the place of the old ones. Some, however, might take more pre-planning.

One of the aims of the reforms is to keep the elderly in their homes for as long as possible. To this end, the government will lift the number of home-care packages to 100,000 from 60,000 over the next five years.

Related Quotes

Company Profile

Rachel Lane, founder and principal of consultancy firm Aged Care Gurus, agrees the number of packages is likely to be insufficient and urges the elderly to arrange an official assessment by a government-approved aged-care assessment team (ACAT) immediately.

Having an assessment will enable the individual to apply for a subsidised home-care package.

“People delay in getting the assessment because they assume they will be forced to get help. But that is not the case. It is like getting a passport [that will allow you to apply for care in the home]," Lane says.

One of the biggest changes is on the nursing home side of the aged-care equation. The system now provides for low-care and high-care facilities. The latter are appropriate for those who need a high degree of assistance with daily living and medication. Low-level accommodation is suitable for people who can no longer look after themselves comfortably.

Low-level accommodation providers require a bond, which is means tested, to be paid in a lump sum or through a series of payments, while high-care providers do not.

From July 2014 there will be no distinction between low- and high-care providers and everyone will be required to pay a bond, or “accommodation payment", either as a lump sum, periodic payments or a combination of the two.

It is expected everyone with more than $40,500 of assets will have to make the accommodation payment, which is now the case for people moving into low-care facilities.

People with more than $153,905 of assets (up from $108,266 today) will be required to pay the bond in full, as will individuals with no assets but an annual income of more than $63,905. At the moment the level of the bond – which is usually about $300,000 to $350,000 but can be as high as $1 million – is set by the provider, based on the level of facilities and local property prices.

In the brave new aged-care world, the federal government will create an aged-care financing authority which “will be required to approve the level of lump sum payment or equivalent periodic payment for each aged-care home to ensure that these charges truly reflect the value of the accommodation services offered".

The model for charging care fees at nursing homes will also change. At present there is a basic daily care fee (which is paid by everyone but is dependent on the resident’s level of private income) and an income-tested care fee of up to $67.04 a day.

In a key difference, from July 2014 the second fee will be means-tested based on both the level of income and assets.

These changes have set off alarm bells among financial planners. The upside of the accommodation payment arrangement is that the provider will no longer be allowed to keep a portion of the payment. However, it is expected that the model for setting the price of accommodation payments will render the highly popular “bonus bond strategy" redundant.

Besides, some planners argue, it is a mystery why the government wants to get involved in setting the price of entry fees to facilities.

The so-called bonus bond strategy is one where the incoming resident negotiates to pay a higher bond than the facility is asking, in exchange for reduced care fees.

The advantage of this model is that money tied up in accommodation bonds is not counted towards the assets test for the aged pension – and would presumably not be counted towards the assets test for the means-tested care fee.

“This would be a huge disadvantage," says ipac’s Jones. “There is now the opportunity to pay a bigger bond and not to have to pay any other fees."

Still, says Nigol, when it comes to fees for extra services, the government may not be able to intervene. Extra services fees can range from $50 to $100 a day and cover hotel-style services such as wine with meals and social programs. Nigol predicts residents will be able to pay a higher accommodation bond for these.

“Extra services fees are a private treaty. I don’t know if the government could stop that happening."

Karl Hunting, financial planner at Aged Care Financial Services, also predicts there will be some ability to pay a higher accommodation bond in lieu of care fees. After all, how is the aged-care financing authority to know if entry to a particular bed is worth $400,000 or $500,000?

“I think there will still be some flexibility, in the order of $100,000 to $200,000," he says.

Still, paring back the opportunity to pay a bigger entry payment is likely to encourage strategies aimed at minimising a resident’s assets.

The other reason to reduce assets is to get round the means-tested fees.

“There are options to minimise your assets but you have to be careful," Jones says.

One strategy might be to “restructure" a portfolio of assets early. Under the gifting rules, a person is allowed to give away $10,000 a year, or up to $30,000 over five years, and have that amount exempt from the assets test for the age pension.

If the individual gives away more, it will be counted towards the assets test for five years, but not after that.

With a bit of foresight, elderly people with a trustworthy, loyal family would be able to give away their assets on the understanding that their children would pay for their future aged-care needs.

“You will need to do something five years and one day before," says Nigol, but the risk is that the family reneges on the deal and keeps the money. Another option might be to keep the family home, rent it out and pay the accommodation payment in instalments, rather than sell it and make the payment in full.

This is not a popular strategy at the moment because there is the option of paying a high accommodation bond in return for cheap services and because of the high interest charged for paying by instalments.

But, under the new rules, this model might become more attractive. “If you are paying some or all of your daily accommodation charge via a daily fee, you can keep your home and rent it out," says Lane, co-author of the book Aged Care Who Cares? “The asset and the rental income will be exempt from both your pension entitlement and the care contribution fee."

Self-funded retirees should cease to think of their investment portfolio, particularly the portion outside super, as a source to finance the day-to-day fees. They need to look at their home as the best way of meeting the costs of aged care.

Still, people will have to weigh up the amount of interest the facility will charge on the accommodation bond that’s paid in instalments and the likely rental income from the home, as well as movements in property prices.

Hunting calculates that an elderly person with a home worth $400,000, $500,000 of cash and shares and receiving a part pension will face total annual costs of $48,500 under the new system, against $29,800 now.

“For this client, strategies may include looking to lodge an accommodation payment – which may reduce their means-tested fee but may result in lower cash returns given that accommodation bonds are not growing in value – compared to leaving the monies in a term deposit," Hunting says.

“Other income compression strategies may be explored such as the use of allocated pensions, annuities or other non income-bearing assets to reduce the means-tested care fees.

“Rental returns would be assessable from a taxation perspective, however, would be excluded from the means-tested care fee if set up correctly."